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Safe Withdrawal Rate vs. Optimal Withdrawal Rate Thumbnail

Safe Withdrawal Rate vs. Optimal Withdrawal Rate

What is a Withdrawal Rate?

The concept of a withdrawal rate is key to retirement planning.  A withdrawal rate in retirement planning represents the beginning percentage of a retiree’s investment portfolio they plan to distribute annually to fund retirement spending.  If a retiree couple has a $1,000,000 investment portfolio and needs $45,000 per year to help fund their remaining retirement expenses, they have a beginning withdrawal rate of 4.5%.  Ironically, financial advisors often talk in terms of withdrawal rates, but a withdrawal rate is really only used to establish the beginning withdrawal amount, which in this example would be $45,000.  Retirees fund their retirement expenses with dollars, not a set annual withdrawal percentage of a volatile investment portfolio.  Traditionally, after the dollar amount has been set, it is adjusted for inflation each year.  So, if inflation ran 3.0% for the year, the $45,000 distribution would become $46,350 the following year and so on.  

So why then do we talk in terms of a withdrawal rate?  A withdrawal rate gives us an apples-to-apples measure that we can use to start retirement planning.  Dollars by themselves do not tell us enough.  Is $100,000 too much to withdraw?  Well, it depends on the size of the investment portfolio and the percentage withdrawal $100,000 represents.  Based on research and historical outcomes, we know there is a realistic range to the beginning withdrawal rate that can lead to a sustainable retirement.     

Safe Withdrawal Rate

Much of the research done on this topic refers to the “safe withdrawal rate.”  A safe withdrawal rate is the highest withdrawal rate that could pass all possible scenarios within the research’s scope.  The best-known example of this is William Bengen’s research study “Determining Withdrawal Rates Using Historical Data” published in Journal of Financial Planning in 1994, which came to be known as the “4% rule.”  It was this study that really gave birth to sustainable withdrawal research.

William Bengen took a 50% stock (using the S&P 500) and 50% bond (using intermediate-term government bonds) portfolio and viewed the results over thirty different rolling thirty-year periods starting in 1926.  The very worst-case scenario occurred in the thirty-year period starting in 1966.  The highest initial withdrawal rate, with inflation adjustments, a retiree could have taken during this time reflected an initial withdrawal rate of 4.15%.

Unfortunately, the idea of this 4% safe withdrawal rate still runs deep with many advisors when retirement planning.  The problems with this are many.  

  • It is never a good idea to simply extrapolate the past into the future.  Who is to say there could not be a worse period to be experienced.  
  • Your portfolio probably looks different than 50% in the S&P 500 and 50% in intermediate-term government bonds.
  • This research does not include any investment costs for an advisor or fund expense ratios.
  • This research assumes the retiree cannot make any adjustments to their withdrawal plans for the duration of the 30-year period.  Good retirement planning is dynamic, not a one-time set it and forget it.
  • If you experienced any period but the worst-case scenario, you stand to pass leaving a lot of money on the table.   Money that could have been used to maximize happiness and contentment while living.  Bengen’s research shows that in all but the worst-case scenario, the hypothetical retiree could have started with initial withdrawal rates between 4% and 8% (and even over 8% in some periods starting in the early 1980s).
  • It’s lazy!  Financial advisors that charge fees based on the size of your investment portfolio (%AUM) are all too happy to take this “safe” and easy approach and watch your portfolio grow during your retirement.   

The point is, there is a big difference between what is considered a “safe” withdrawal rate and the withdrawal rate you should select.

Optimal Withdrawal Rate 

The initial withdrawal rate that is best for you is known as your optimal withdrawal rate.  Your optimal withdrawal rate is dependent on many factors, but in most cases, should be higher than the "safe" withdrawal rate.  Following are the factors to consider when thinking about your optimal withdrawal rate:

Risk Profile, Asset Allocation Decision, and Portfolio Construction

Your risk profile, asset allocation decision, and portfolio construction will be material inputs.  The more stock exposure you can manage, the higher your optimal withdrawal rate can be, all else being equal.  Additionally, planning for scenarios with less than a 90% Monte Carlo analysis probability of success can be prudent, assuming other areas of your retirement plan are in order and you are willing to maintain some flexibility to change should a “bad-case” scenario become a reality.  Lastly, maintaining a maximally diversified portfolio will minimize volatility and improve outcomes allowing for a higher withdrawal rate.  See our Insight entitled “Building an Investment Portfolio for Retirement” for more on this topic.

Total Cost of Investment Management

The expenses you incur for retirement planning and investment management can also have a material effect on your optimal withdrawal rate.  Based on data published by the Investment Company Institute’s 2020 Factbook, the average expense ratio of all stock funds offered for sale in 2019 was 1.24%, and the average for all bond funds was 0.93%. Based on these averages, a 50% stock and 50% bond portfolio would carry a weighted average expense ratio of 1.09%.  Building a portfolio using low-cost index funds can cut this expense down tremendously.   Using only nine low-cost index funds, each representing one of the nine asset classes we believe a retiree should hold, we build portfolios for clients giving them exposure to approximately 30,000 individual securities across all investable 44 countries, and the portfolio’s weighted average expense ratio is only 0.07% or less.  This is an annual savings of 1.02%.  

RIA in a Box did a study in 2018 and found the average advisor that charges on a percentage of assets under management (%AUM) basis, which is, unfortunately, a norm in the industry, charges 0.95%.  If you can find a flat-fee manager, you may be able to reduce your dollar cost substantially. 

See our Insights entitled “Total Cost of Investing – The Easiest of Retirement Optimization Strategies” and “Why a Flat-Fee Advisor is Best for Retirees” for more on this topic.

Level of Tax Planning

Strategic tax planning for efficient retirement distributions, including careful Roth IRA conversion strategy analysis, can minimize your lifetime taxes.  In addition, employing tax-efficient asset management strategies such as asset selection, asset location, tax-loss harvesting, and gain harvesting can also maximize your tax situation.  In their well-known Advisor’s Alpha research, Vanguard estimates up to 1.85% of annual return equivalent value can be created by employing all of these strategies.  See our Insights entitled “Strategies to Manage Taxes in Retirement” and “Roth IRA Conversions – Hedge Against Higher Future Tax Rates” for more on this topic.

Willingness to be Flexible in Approach to Portfolio Withdrawals

Applying a rules-based approach to portfolio withdrawals, we can actually increase your sustainable withdrawal rate while also lowering your risk at the same time.   In their “Alpha, Beta, and Now… Gamma” research paper, Morningstar found that applying a dynamic withdrawal strategy can add more value than all tax strategies combined.  See our Insights entitled “Dynamic Withdrawal Rules – Higher Withdrawals With Less Risk” and “Dynamic Withdrawal Rules – A Significant Opportunity for Retirement Plan Optimization” for more on this topic.

Level of Risk Management and Reserve Assets

Your investment portfolio is an asset, but it’s not your only asset, and some assets are better suited than others at tackling particular objectives within your retirement plan.  Asset types can be exchanged for one another to maximize your situation.  Optimizing your asset usage and maintaining adequate reserve assets help you to manage risk and provide you with greater flexibility to make changes.  See our Insight entitled “Using ALL Retirement Assets to Maximize Your Outcome” for more on this topic.

Don't Leave Money on the Table

You have worked hard and made sacrifices to earn the right to a secure and fulfilling retirement.  You deserve to make the most of your situation and soak up every bit of what brings you joy and meaning in retirement.  Do not leave money on the table beyond what is planned for by following some lazy, rule of thumb “safe” withdrawal rate.  Instead, figure out your optimal withdrawal rate so you can maximize your quality of life while living.

If you are ready to figure out your optimal withdrawal rate, we stand by ready to help.  Contact us here at any time.




Thrive Retirement Specialists is a retirement planning specialist dedicated to delivering a more thoughtful and strategic approach to retirement planning for those nearing or in retirement. We are a fee-only Registered Investment Advisor (RIA) offering a single, flat-fee service entitled ThriveRetireTM that goes far beyond what has traditionally been known as retirement planning.  ThriveRetire™ is an engaging ongoing 8-step retirement planning process and investment management service that seeks to identify all risks, assets, tools, and tactics to develop an optimal retirement plan designed to support your ideal retirement lifestyle and goals to the fullest extent possible.  With every interaction, we seek to inform and serve, so our clients can safely trust their ThriveRetire™ plan and process, leaving each client with the confidence and peace of mind to live a vibrant and full life through retirement.


Prior to founding Thrive Retirement Specialists, Tony spent eight years serving as the Chief Investment Officer of a firm where he provided advice and investment management services to over 600 individuals representing at the time over $1.5 billion of investments. Before this, Tony served as Vice President at J.P. Morgan Private Bank, where he advised high- and ultra-high net worth individuals on all matters of wealth, including investments, portfolio construction, portfolio management, and retirement planning.

Tony lives in Dearborn, Michigan, with his wife Dawn and daughters Emma and Anna.


  • BBA in Finance, Walsh College
  • MBA, University of Michigan, Ross School of Business

Follow Anthony Watson, CFA, CFP®


  • Chartered Financial Analyst (CFA)
  • Certified Financial Planner (CFP®)